1

Executive Summary

This paper investigates the technical, pure technical and scale efficiency of the Islamic

banks operating in Bangladesh applying a non-parametric, Data Envelopment Analysis

(DEA) method. Data were collected from the annual reports of the respective banks,

and DEA-solver software was used to analyze the data in two different phases

considering different input-output variables. Analysis in the first phase revealed that

technical efficiency of all the Islamic banks was very high which amounting to an

average of 98 percent, 96 percent, 98 percent and 96 percent in 2010, 2011, 2012, and

2013 respectively. Analysis in the second phase revealed that the inclusion of some new

variables changed the result completely. Including some more variables in the analysis

of efficiency measurement process, it was found that all the Islamic banks were

technically efficient in all the period of the study; except in 2012 SIBL, AAIBL, and

ICB Islamic banks which were technically inefficient. Finally, this study came up with

some recommendations to enhance the technical efficiency of inefficient banks.

Nevertheless, the results of the study are constrained by the lacking of adequate

literature in this field of study and robustness of the analysis.

 2

Table of Contents

Executive Summary............................................................................................................... 1
Introduction .......................................................................................................................... 3
Limitation of the study ...................................................................................................... 4
Literature Review.................................................................................................................. 4
Bank Industry of Bangladesh ................................................................................................. 8
Islamic Bank Vs Conventional Bank ..................................................................................... 12
Definition of Islamic Bank ............................................................................................ 13
Definition of conventional Bank: ................................................................................. 13
Islami Bank Bangladesh Limited .......................................................................................... 21
Mission ........................................................................................................................... 21
Vision .............................................................................................................................. 21
Islamic Banking System ....................................................................................................... 24
Operation Efficiency Islami Bank ......................................................................................... 27
Financial Analysis ................................................................................................................ 31
Conclusion .......................................................................................................................... 33
Reference ........................................................................................................................... 34
 3

Introduction

The financial deepening process as well as the competitiveness, efficiency and

profitability of the banking industry are among the major indicators for the

development of a financial system. The banking sector, in particular plays a critical

role as a financial intermediary that channels funds from the surplus units to the

deficit units, thereby promoting savings, investments and trade, while simultaneously

functions as a repository of money. In view of the diverse role of the banking sector in

the economy, the performance and stability of the banking industry have a direct

bearing on the sustainability of the economy. According to Sharma et al. (2012), an

efficient financial sector is a primary requirement for a country’s economic

development. Efficiency measurement of the banking sector, in particular has

significant impact on the overall performance of the economy.

In Bangladesh, the total size of the banking industry is approximately 61% of

the total Gross Domestic Product (GDP), which is proportionately large for a country

with a per capita income of only about US$870 (Bangladesh Bank Quarterly Review,

2011).The banking sector is comprised of the commercial banks and development

financial institutions. The commercial banks can further be categorized into state-

owned, private, and foreign commercial banks. According to the central bank of

Bangladesh– the Bangladesh Bank, the banking industry has continued to expand as

reflected by the increasing number of branches, deposits and advances of all the bank

types in both the rural and urban areas of the country. More importantly, the banks

continue torecord profitability and stability in spite of the global financial crisis in

2007-2008(Bangladesh Bank, 2013). In view of this, it would be interesting to

 4

investigate the efficiency measurement of this crucial financial segment of the

Bangladesh economy.

While there has been a rich literature focusing on the issues of bank
performance, its stability and specific bank characteristics, studies comparing the
efficiency between conventional and Islamic banks, particularly in Bangladesh have
been very few. This study aims to undertake an empirical investigation on comparing
the efficiency between the conventional and Islamic banks in Bangladesh. In
achieving its objective, this study attempts to compare the efficiency levels between
selected Islamic and conventional banks, and examine the sources that may influence
the efficiency levels of these banks.

Limitation of the study

Though the authors tried their best to bring in perfection, the study suffers

from the limitation that analysis and interpretation of the study largely depends on

secondary sources of data which does not provide the large scope to understand

efficiency of deposit management between the Islami Bank and a conventional Bank.

Literature Review

Tlemsani et al. (2016) reported that Islamic finance is explicitly concerned

with spiritual values and social justice, in contrast to conventional finance, which is

based on the maximization of individual utility, welfare and choice, as expressed for

example in the shareholder value model. Islamic and conventional banks respond

differently to financial shocks. Islamic banking is banking or banking activity that is

consistent with the principles of Shariah law and its practical application through the

development of Islamic economics. Islamic Shariah prohibits the fixed or floating

payment or acceptance of specific interest or fees (known as riba, or usury) for loans

of money. Investing in businesses that provide goods or services considered contrary

to Islamic principles is also Haram (sinful and prohibited). Although these principles
 5

have been applied in varying degrees by historical Islamic economies due to lack of

Islamic practice, only in the late 20th century were a number of Islamic banks formed

to apply these principles to private or semi-private commercial institutions within the

Muslim community. Islamic banking has the same purpose as conventional banking

except that it operates in accordance with the rules of Shariah, known as Fiqh al-

Muamalat. Amongst the common Islamic concepts used in Islamic banking are profit

sharing (Mudarabah), safekeeping (Wadiah), joint venture (Musharaka), cost plus

(Murabaha), and leasing (Ijara). (Uddin, 2014)

Alkhatib and Harsheh (2012) examined the financial performance of five

Palestinian commercial banks using three indicators: Internal–based, Market-based

and Economic–based performance measures. Return on Assets, Tobin’s Q model and

Economic Value add methods have been used for measuring these three indicators.

Correlation and multiple regression analysis have been applied in this study to analyze

the influence of bank size, credit risk, operational efficiency and asset management on

financial performance and to create a good-fit regression model to predict the future

financial performance of these banks. As findings, the study has indicated that there is

a significant impact of bank size, credit risk, operational efficiency and asset

management on financial performance of Palestinian commercial banks. Sehrish et al.

(2012) analyzed financial performance of Islamic banks and conventional banks in

Pakistan over the period 2007-2011 using six financial ratios on eight banks found

that Islamic banks are less risky in loan compare to conventional banks and less

efficient in expenses management compared to conventional banks. Sangmi and Nazir

(2010) evaluated the financial performance of the two major northern Indian banks

using CAMEL Parameters. In this study the positions of these two banks have been
 6

highlighted as sound and satisfactory with respect to their capital adequacy, asset

quality, management capability and liquidity.

Jahangir, Shill and Haque (2007) stated that the traditional measure of

profitability through stockholder’s equity is quite different in banking industry from

any other sector of business, where loan-to-deposit ratio works as a very good

indicator of banks' profitability as it depicts the status of asset-liability management of

banks. But banks' risk is not only associated with this asset liability management but

also related to growth opportunity. Smooth growth ensures higher future returns to

holders and there lies the profitability which means not only current profits but future

returns as well. So, market size and market concentration index along with return to

equity and loan-to-deposit ratio grab

Within the context of Bangladesh, Roy and Khan (2013) investigated the

effect of overall service quality, product quality, and corporate social performance on

reputation of private commercial banks. After the survey of eighty clients and

employees of ten private commercial banks of Dhaka City area, the study applied

correlation and stepwise regression to assess the hypothesis. The correlation analysis

supported the entire hypotheses but the stepwise regression provided partial support.

However, the study concluded that overall service quality, overall product quality, and

corporate social performance are statistically and significantly correlated with bank

reputation (Rahman et al., 2017).

Akhtar et al. (2011) did comparative analysis of Islamic and conventional

banks by focusing the importance of size of the firm, networking capital, return on

equity, capital adequacy and return on asset with liquidity risk management. It is

found that size of the banks and networking capital to net assets having positive but
 7

insignificant relationship with liquidity risk. While the capital adequacy in

conventional banks and return on asset in Islamic banks had a positive and significant

relationship with liquidity risk. Jaffar and Manarvi (2011) evaluated the performance

of Islamic and conventional banks through CAMEL test during the period of 2005 to

2009. The sample of their research is 5 Islamic and 5 conventional banks. It is found

that Islamic banks performed better and having high liquidity than the conventional

banks, moreover it is realized that conventional banks have pioneer in the

management and having a good earning ability.

For the period 2003-2004, Kosmidou and Zopounidis (2008) evaluated and

rated the performance and efficiency of the commercial and cooperative banks in

Greece. They found in this study that commercial banks are becoming more

competitive and maximizing their profits by increasing their accounts, attracting more

customers and improving their financial indices. But in case of the cooperative banks,

it has been found that, some are enjoying considerably increased profits and market

shares while financial indices have been found to be deteriorating for others.

Mokhtar, Abdullah, and Alhabshi (2008) investigated the efficiency of

Conventional and Islamic banks of Malaysia for a period of 1997-2003 and it is

examined that conventional bank showing greater efficiency compared to well-

established Islamic banks.

Widagdo and Ika (2008) have investigated the financial performance of

Indonesian Islamic and conventional banks that what is the difference in performance

of said banks prior and post fatwa released in 2004 with the help of set of financial

ratios. The empirical results have shown the difference in performance but this

difference in not statistically significant.

 8

Islamic banking performance has been ahead to non-Islamic banks in

operative efficiency during global monetary crises and acknowledged that survival of

Islamic financial institutions even in worst situation is sustainable and Islamic

banking is projected to breed, sustain and will be widely acknowledged in coming

time (Al-samdi, Hamdan&Almsafir, 2013).

Bank Industry of Bangladesh

The banking sector in Bangladesh consists of several types of institutions.

Bangladesh Bank is the central bank of Bangladesh and the chief regulatory authority

in the banking sector. Pursuant to Bangladesh Bank Order, 1972 the Government of

Bangladesh reorganized the Dhaka Branch of the State Bank of Pakistan as the central

bank of the country, and named it Bangladesh Bank with retrospective effect from 16

December 1971. Other than the Central Bank itself, banks in Bangladesh are primarily

categorized into 2 types. They are Scheduled Banks and Non-Scheduled Banks

Whoever, being an individual firm, company or corporation generally deals’ in

the business of money and credit Is called a bank. In our country, any institution,

which accepts for the purpose of lending or Investment deposits of money from

public, repayable on demand or otherwise, and with transferable by checks draft order

& otherwise is called a bank?

The purpose of Banking is to ensure transfer of money from surplus unit to

deficit units Banks In all countries work as the repository of money. The owners look

for safety and amount of Interest for their deposits with Banks. Entrepreneurs try to

obtain money from the banks as working capital and for long term investment these

entrepreneurs welcome effective and forward-looking advice for Investment Banking

 9

sector thus owe a great deal to the deposit holders on the one hand and the

entrepreneurs on the other. They are expected to play the role of friend, philosopher,

and guide for the deposit holders and the entrepreneurs.

Since liberation, Bangladesh passed through fragile phases of development In

the Banking sector. The nationalization of Banks In the post liberation period was

intended to safe the Institutions and the Interest of the depositors. Those handling the

banking sector have borne the burden of putting banks on reliable footings. Despite all

that was done, some elements of irregularities appeared. With the assertion of the role

of the Central Bank, the Bangladesh Bank started adopting measures for putting

banking institutions on right track Yet the preponderance of public sector

management of banks left some negative effects In the money market In particular

and the economy In general The agility among the borrowers manipulates the banking

sector as a whole. In effect, a default culture, among other effects, appeared on the

scene.

The opening of private and foreign participants to the banking sector was

intended to obtain desirable results from banking. The authorization of private banks

was designed to create competition among the banks and competition in the form of

efficiency within and the productivity In enterprises funded by banks. Unfortunately,

for the people, at large, banking sector is yet to obtain the credit for efficiency,

credibility and growth.

The clever, among the user of banking services, have influenced the

management of banks, for obtaining short term and long term loans. They sometimes

showed inflated equity to get money for Investment in businesses and industry. Few

diverted their loan money to purposes different from the loan proposals, and Invested
 10

In non-profitable units have failed to repay their loans to the banks. For this reason

new entrepreneurs are not getting capital while defaulting entrepreneurs have started

obtaining either relief in the form of rescheduling of the repayment program or

additional inevitable money for diversified units.

But now, the situation is changing day by day, Bangladesh Bank is taking

more initiative for reducing the bad loan. The banks’ are also taking smart techniques

and decision to reduce the bad loan and Investing In more secured place. This is not

only good for the banks but also good for Bangladesh economy, because Investors are

trying to improve their business decision & innovating more constructive business

plan.

For the improvement of banking sector, Bangladesh Bank took some changes in

Banking Company Ad in the recent year and some changes also In progress. Which

are as follows:

 Every bank has to increase their paid up capital and reserve from 10 million to

20 million

 There should not be more than 13 directors in a bank (except the Investors).

 If any family holds more than 5% of share, then two directors may be

appointed from that family at best.

 If any family holds less than 5% of share, then one director may be appointed

from that family at best.

 Excepts the Managing Director, other directors should not hold his post more

than two times continuously.

 Excepts these rules, Bangladesh Bank enhanced the penalties more Ideal for

the miss users of these Act.

 11

Bangladesh Bank is trying to improve the strength of banking sector of

Bangladesh, for this reason it wants to Increase banks paid up capital and reserve

from 20 million to 40 million between few years. Because In India it’s now 30 million

and in Pakistan it’s 50 million. If any bank face difficulty to improve their paid up

capital and reserve then Bangladesh Banks suggestion is to merge with another bank.

Banking is the backbone of national economy. All sorts of economic and

financial activities revolve round the axis of the bank. As the industry produces goods

and commodities, so does the bank creates and controls money-market and promotes

formation of capital. From this point of view, banking-a technical profession- can be

termed as industry. Services to its customers are the products of banking industry

besides being a pivotal factor in promoting capital formation in the country. As all

economic and fiscal activities revolve round this important ‘Industry, the role of

banking can hardly be over emphasized. Circumstances being such, It becomes

Imperative to find out the role that now planning in the country and analyze its

operational aspects so as to ascertain the Importance of this delicate financial sector

and its overall Impact on our national economy. To ascertain the role of banks and to

analyze its operational aspects and its overall Impact on our national economy a

thorough study as to its distribution, expansion and contribution Is essential to

comprehend Its past, present and future bearings for the growth and development of

the banking sector of the country. In the global context, the role banks is far –

reaching and more penetrating In the economic and fiscal discipline, trade, commerce,

Industry, export and import- all carried through the bank. Banks are the only media

through which international trade and commerce emanate and entire credit

transactions, both national and International.

 12

Islamic Bank Vs Conventional Bank

“Allah has permitted trade and forbidden usury” (Sura-Al-baqarah- 275)

Interest which has been the basis of conventional banking is prohibited by

Islam in unqualified term. Reminding this thing in mind and to harmonize banking

practices with the requirements of Islamic ideals of social and economic life, Islami

banking has been emerged. Islami banks operate on Islamic principles of profit and

loss sharing and strictly avoiding interest which is the root of all exploitation and

responsible for large scale inflation and unemployment.

o one of the basic difference between Conventional/ Interest based banking

and Shari’ah based banking is:

The former (Conventional Banking) provides the depositors with a return of a

predetermined rate known as interest rate on the amount deposit irrespective of the

utility of the concerned deposit/ fund. Thus conventional bank offers its depositors a

fixed return (rate/ percentage) of the deposit (say 10% on deposit). Such a return is

called Interest.

The latter (Islamic Banking) provides the depositors with a share of income/

revenue the bank earns by deploying those funds. Islamic banking, among other

prohibitions, permits neither to pay nor to receive interest. It offers its depositors an

agreed share/ proportion of income it earns through investment of their fund (say 40%

of earned income unlike a conventional rate variable such as 10% on deposit). In

other words under Islamic Banking profit to depositors is essentially a consequence of

Return on Investment (ROI)/ Return on Asset (ROA). In terms of cause and effect
 13

such profit is the effect. It is neither the cause nor is it the independent. The share of

(gross) income/ revenue (fetched by the bank) thus paid to the depositors is called/

known as profit.

However the Islami banking is completely separate and distinctive from

conventional in regard to its principles, objectives, goals, procedures and

methodologies.

Though my internship was going on general banking operation of Islami

banking branch of AB Bank Ltd, I have also studied including investment the other

sides of banking for seeking the differences between the Conventional and Islami

banking. Because the difference is very little in banking operation and deposit

collection. Rather the differences are mainly on the mechanism, principles, objectives,

goals, procedures, investment, return etc. I have also showed some graphical

presentation of performance for practicing Islamic banking in my branch over

Conventional banking.

Definition of Islamic Bank: “Islamic Bank is a financial institution whose statutes,

rules and procedures expressly state its commitment to the principles of Islamic

Shari’ah and to the banning of the receipt and payment of interest on any of its

operations.” – OIC.

In the April of 1978 this definition was approved in the conference of foreign

ministers of Muslim countries held at Dakar the capital of Senegal.

Islamic banking is essentially a normative concept and could be defined as

conduct of banking in consonance with the ethics of the value system of Islam

Definition of conventional Bank:

“A bank is dealer in debt – his own and of other people” – Crowther

 14

“We can define a bank as an institution whose debts are widely accepted in

settlement of other peoples’ debt to each other” – Sayers

“A commercial bank is dealer in capital or more properly a dealer in money.

He is intermediate party between the borrower and the lender. He borrows from one

party and lends to another and the difference between the terms at which he borrows

and those at which he lends form the source of his profit.” —-Prof. Gilbert
 15

Conventional Banking Islamic Banking

The main objective of conventional banking is The main objective of Islamic banking is to

to help the maximization of profit motive of the help in building development and helping

business, commerce and industry. welfare of the human being by ending

exploitation and Zulm from the society

through the directives of the Almighty Allah.

Earning of profit Establishment of an Interest-free financial

system

Creating medium of exchange Ensuring justice to both suppliers of fund

(depositor) and user of fund (Investment

Development of industry and commerce Encouraging and patronizing

entrepreneurship

Development of a healthy money market Alleviating poverty through Zakat and profit

sharing micro-finance.

In conventional bank, the relation between An Islamic banking is not only banker but also

customer and banker is nothing but debtor and a partner in business. It is a participatory

creditor. The bank does not have the banking in capital and profit/ loss.

responsibility of profit/loss of the customer.

 16

The conventional banks give greater emphasis The Islamic banks, on the other hand, give

on credit-worthiness of the clients. greater emphasis on the viability of the

projects.

Very often it results in the bank’s own interest It gives due importance to the public interest.

becoming prominent. It makes no effort to Its ultimate aim is to ensure growth with

ensure growth with equity. equity.

For interest-based banks, borrowing from the For the Islamic banks, it must be based on a

money market is relatively easier. Shari’ah approved underlying transaction.

The activities of conventional banking are done All the activities of Islamic banking are done

by the procedures and laws evolved through according to Islamic Laws (Shari’ah ) i.e. as

human research, studies and innovation. per guideline and directives of the Holy

Qur’an and the Sunnah.

Conventional banking follows the man made Islamic banks are to follow Quran, Sunnah,

practice and rules. Ijma and Kias i.e. Shari’ah, in all the business

transactions including Accounting entires.

The basis of conventional banking is is interest In Islamic banking interest (Riba) is strictly

and as such its all activities are operated with prohibited and consequently all its activities

interest. are operated without involvement of interest.

It aims at maximizing profit without any It also aims at maximizing profit but subject

restriction to Shari’ah restrictions

 17

Leading money and getting it back with interest Participation in partnership business is the

is the fundamental function of the conventional fundamental function of the Islamic banks.

banks.

Collection of deposit on the basis of interest Collection of deposit on the basis of profit

sharing

Extending credit on the basis of interest. Investment following Buy mode/investment

mode/ lease mode

Creating medium of exchange and credit Acting against Creation of medium of

exchange and credit

Investment in shares and securities having Investment in shares and Mudarabah bond

coupon rate of interest

Discounting of bill No discounting of bill

Conventional banks do not think about as much To ensure equitable distribution of wealth and

economic and social responsibility as the Islami to establish socio-economic justice is the

banks do. main concern of Islamic Banking.

There is no commitment and undertaking in Islami banks make coordination with social

conventional banking system to make development and economic development. It

coordination with social development and has clear social commitment.

economic development.
 18

They do not consider social factors or aspects Islamic banks encourage investment in

rather it gives more importance on earning production of essential as well as in social

profit. welfare sector.

There is no justification or consideration Islamic banks do not do the business on items

whether the business id good or bad in harmful for societies though there are

conventional banking system. Earning interest possibilities to earn more there against.

is the main motive of this system

Collection of deposit on the basis of interest Collection of deposit on the basis of profit &

loss sharing

A conventional bank has to guarantee all its Islamic bank can only guarantee deposits for

deposits. deposit account, which is based on the

principle of al-wadiah, thus the depositors are

guaranteed repayment of their funds, however

if the account is based on the mudarabah

concept, client have to share in a loss position.

Their depositors do not share any profit or bear Mudaraba depositors are to share the loss if

any loss. any, incurred out of investment made from

mudaraba Deposits.

The mode of investment is basically lending. The basic mode is investment through

Bai+lease+direct Investment
 19

Since income from the advances is fixed, it Since it shares profit and loss, the Islamic

gives little importance to developing expertise banks pay greater attention to developing

in project appraisal and evaluations. project appraisal and evaluations.

Purpose of the loan is considered with less It is the most important to consider the

importance. purpose of the loan.

National interest is the secondary consideration. National interest is the primary consideration.

Diversification of profit is the most important Diversification is not a prime consideration.

consideration

Close and constant supervision and monitoring Close and constant supervision and

is must be a routine work monitoring is not a routine work

In conventional Banking there is no practice of In Musharaka, Mudaraba, Bai-Salam modes

Musharaka, Mudaraba, Bai-Salam modes of of Investment, income cannot be accounted

Investment and most of their income can be for on accrual basis.

recognized on accrual basis.

No bai-Muraba and bai-muazzal investment in For delay of payment of investment by the

conventional banks. They charge interest/ clients, in case of Bai-Mudaraba and Bai-

penalty interest for delay in payment/ Muazzal etc. investment further amount of

repayment. profit cannot be charged

They do not pay a certain amount to the Islamic Bank is to pay zakat 2.50% or 2.58%

depositor from their investment income, rather on its reserves.

 20

pay fixed rate of interest irrespective of

investment income.

They only follow International Financial Islamic Banks are to follow Accounting and

Reporting Standards (IFRS), Bangladesh Bank Shari’ah standards developed by Accounting

guidelines, The rules of the Income tax, The and Auditing Organization for Islamic

rules of the companies Act, The rules of the Sec. Financial Institution (AAOIFI) in addition to

International Financial Reporting

Standards(IFRS) developed by International

Federation of Accountants, Bangladesh Bank

guidelines, The rules of Income Tax, The

rules of Companies Act , The rules of the

SEC. .

They conduct their transactions on interest They cannot engage in any interest

basis. transactions.

Interest is their main income If any interest is included/ entered in the

operation of the banks, that should be

excluded from the regular income of the Bank

They do not follow the Shari’ah rules and If any income is earned violating Shari’ah

regulations. Principles that cannot be included in the

distributable income of the bank.

 21

Islami Bank Bangladesh Limited

Islami Bank Bangladesh Limited is a Joint Venture Public Limited Company

engaged in commercial banking business based on Islamic Shari'ah with 63.09%

foreign shareholding having largest branch network ( total 342 Branches) among the

private sector Banks in Bangladesh. It was established on the 13th March 1983 as the

first Islamic Bank in the South East Asia.

It is listed with Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange

Ltd. Authorized Capital of the Bank is Tk. 20,000 million and Paid-up Capital is Tk.

16,099.91 million having 33,686 shareholders as on 31st December 2018.

Mission

To establish Islamic Banking through the introduction of a welfare oriented banking

system and also ensure equity and justice in the field of all economic activities,

achieve balanced growth and equitable development in through diversified investment

operations particularly in the priority sectors and least developed areas of the country.

To encourage socio-economic upliftment and financial services to the loss-income

community particularly in the rural areas.

Vision

Our vision is to always strive to achieve superior financial performance, be

considered a leading Islamic Bank by reputation and performance.

Our goal is to establish and maintain the modern banking techniques, to ensure

soundness and development of the financial system based on Islamic principles and to

become the strong and efficient organization with highly motivated professional,
 22

working for the benefit of people, based upon accountability, transparency and

integrity in order to ensure stability of financial systems.

We will try to encourage savings in the form of direct investment.

We will also try to encourage investment particularly in projects which are

more likely to lead to higher employment.

Strategic Objectives

 To ensure customers' satisfaction.

 To ensure welfare oriented banking.

 To establish a set of managerial succession and adopting technological

changes to ensure successful development of an Islamic Bank as a stable

financial institution.

 To prioritize the clients welfare.

 To emerge as a healthier & stronger bank at the top of the banking sector and

continue stable positions in ratings, based on the volume of quality assets.

 To ensure diversification by Sector, Size, Economic purpose & geographical

location wise Investment and expansion need based Retail and SME/Women

entrepreneur financing.

 To invest in the thrust and priority sectors of the economy.

 To strive hard to become a employer of choice and nurturing & developing

talent in a performance-driven culture.

 To pay more importance in human resources as well as financial capital.

 To ensure lucrative career path, attractive facilities and excellent working

environment.
 23

 To ensure zero tolerance on negligence in compliance issues both sharia’h and

regulatory issues.

 To train & develop human resources continuously & provide adequate

logistics to satisfy customers’ need.

 To be excellent in serving the cause of least developed community and area.

 To motivate team members to take the ownership of every job.

 To ensure development of devoted and satisfied human resources.

 To encourage sound and pro-active future generation.

 To achieve global standard.

 To strengthen corporate culture.

 To ensure Corporate Social Responsibilities (CSR) through all activities.

 To promote using solar energy and green banking culture and ecological

balancing.

Core Values

 Trust in Almighty Allah

 Strict observance of Islamic Shari’ah

 Highest standard of Honesty, Integrity & Morale

 Welfare Banking

 Equity and Justice

 Environmental Consciousness

 Personalized Service

 Adoption of Changed Technology

 Proper Delegation, Transparency & Accountability

 24

Commitments

 To Shariah

 To the Regulators

 To the Shareholders

 To the Community

 To the Customers

 To the Employees

 To other stakeholders

 To Environment

Islamic Banking System

Islamic banking, also known as non-interest banking, is a banking system that

is based on the principles of Islamic or Sharia law and guided by Islamic economics.

Two fundamental principles of Islamic banking are the sharing of profit and loss, and

the prohibition of the collection and payment of interest by lenders and investors.

Islamic law prohibits collecting interest or "riba."

According to OIC,“An Islamic bank is a financial institution whose status,

rules and procedures expressly state its commitment to the principle of Islamic

Shariah and to the banning of the receipt and payment of interest on any of its

operations”(Ali & Sarkar 1995, pp.20-25).It appears from the above definition that

Islamic banking is systems of financial intermediation that avoids receipt and

 25

payment of interest in its transactions and conducts its operations in a way that it

helps achieve the objectives of an Islamic economy. Alternatively, this is a banking

system whose operation is based on Islamic principles.

The principles of Islamic banking follow Sharia law, which is based on the

Quran and the Hadith, the recorded sayings, and actions of the Prophet Muhammad.

When more information or guidance is necessary, Islamic bankers turn to learned

scholars or use independent reasoning based on scholarship and customs. The bankers

also ensure their ideas do not deviate from the fundamental principles of the Quran.

Islamic economic principles offers a balance between extreme capitalism and

communism. It offers the individual the freedom to produce and create wealth, while

surrounding the individual with an environment controlled, not by human rulers, but

by Divine Guidance, which sets moral rules and norms of behavior that must require

the utmost sincerity of intention. When these rules and norms are internalized and

acted upon by people, peace and prosperity result for the wider society.

The Qur'an (2:30) says that man was created as the representative of God on

earth. This concept has a considerable effect on Islamic business, since the lack of a

sense of absolute ownership promotes a sense working for society, especially the

needy.

This is not some philosophical concept, removed from the daily life of the

society. It manifests itself in all the different aspects of lives. What makes the trader,

banker, agriculturist or research and development scientist perform his job to the best

of his ability? In capitalist economies, it is the notion of competition. This involves

the necessity to constantly produce more new things for profit to keep up with others

and this makes for wastage and often generates unbridled greed. But in an economy
 26

based on Islamic principles, the idea of man representing God on earth gives

businessmen a feeling of co-operating with others for the good of society as a whole,

including himself. Thus Quranic guidance enables man to conserve and use prudently

all the resources of the earth that God has given mankind.
 27

Operation Efficiency Islami Bank

lslamic banking system is more efficient indeed. The Operational efficiency of it has

been discussed below:

Practice of 'Pre-fixed Rate' based Modes in Financing

It is widely believed that Mudarabah and Musharakah are effective modes of

financing for Shariah compliance and risk management in lslamic banking because

these modes are 'equity and reward sharing'. In other words, these are 'profit-sharing

and loss bearing'. Loss means capital (principal) loss, not profit loss. There is no

guarantee of capital in Mudarabah and Musharakah. But a bank cannot finance in an

equal chance of making profit or losing principal as it does banking with the

depositor's money which is payable on demand and protected by 15 points of the

'banking safety-net' mentioned below:

1. Collateral securities,

2. Profit waiver

3. Investment re-scheduling,

4. Limit enhancement,

5. Court case,

6. Central bank's audit and control,

7. Capital adequacy ratio,

8. Cash reserve ratio,

9. Statutory liquidity ratio,

10. Provisioning
 28

11. Fund raising from money market,

12. Issue of right and bonus share,

13. Enhancement of authorized capital

14. Tangible assets, and

15. Bank merger

But there is no way to protect principal amount of bank invested under Mudarabah

and Musharakah modes. Suppose, the 'entrepreneur’ of Mudarabah and the partner of

Musharakah may be made liable for loss, through contract and mortgage, with a view

to protecting the principal and sharing the profit only, which may be called profit

musharaka. But this attempt makes the Mudarabah and Musharakah modes parallel to

pre-fixed-rate based modes and in that case the customer prefers the pre- fixed-rate

based modes. Therefore 'pre-fixed-rate' based modes (markup profit) based modes of

finance like Bai Murabaha, Bai Muajjal, Bai-Salam, leasing etc., are being used by

Islamic banks to manage risk These modes covermore than 80% of the investment

portfolio of Islamic banks. entrepreneurial pre-fixed-rate' based modes are useful to

generate ' profit' for the Trading Firms' not for the Islamic banks because if Islamic

bank buy first, like a trader, it involves uncovered risks. Goods may not be sold within

the expected time and profit. As a result, there may be acute liquidity crisis in Islamic

banks. Therefore 'pre-fixed-rate' based modes of finance have been adapted in Islamic

banking through documentary buying and selling of goods to avoid uncovered risk or

market risk and to undertake banking risks. Out of this, Islamic banks earn special

types of profit called Markup Profit', which is not 'interest' because it not 'money upon

money' ie. excess of debt rather it ensures at least 'money link' with the goods and

control over 'money movement' which ultimately contributes to minimize the overdue.
 29

Practice of 'provisional rate’ based Mode in Deposit Mobilization

Islamic banks follow Islamic principle of mudaraba in deposit mobilization. So they

accept deposits at provisional rates. The final rates are being and paid at the closing

business in June and December. In the mudaraba, the depositors are Saheb-al-mal'

(Owners of Fund) Islamic banks are 'Mudarib' (Entrepreneur) of banking. The

depositors invest money in Islamic banking and share profit and loss under Mudaraba

principle (equity and reward sharing) which provides an opportunity to share the risk

of banking (Result of non-performing assets) with the depositors. It is called 'Shock

Absorption' capacity of the Islamic banks. It appears therefore the Islamic bank is not

a financial intermediary' and it does not maintain 'loan-interest relationship' like

conventional banks. This unique nature of Islamic banks provides an in- built-

mechanism of risks minimization for the industry

Avoidance of Interest

Islamic banks in Bangladesh maintain 12.0%. Stationary Liquidity Reserve (SLR)

5.5% and 6.5% Cash Reserve Ratio (CRR), with the central bank, which is 20.0% for

the conventional bank (13.5% SLR+6.5%CRR), on this ground that they cannot

account interest on the SLR maintained with the central bank. Hence Islamic banks

have got an opportunity to earn more income than conventional banks do, as because

the excess liquidity (20%-12%) : 8% of the Islamic bank can be invested at the

commercial rate which generates higher in income from SLR with central bank. come

than

Further, it is shows higher liquidity of the Islamic bank, so the depositors feel. safer,

which attracts further local deposits and foreign remittance. Moreover, the foreign

banks feel encouraged to accept the L/C of Islamic banks.

 30

Moreover, there is a system to recover the principle amount of investment without

profit, in case of willful default, there is no alternative to the Islamic bank except

demanding principal with compensation. However, the Islamic bank does not account

the compensation as part of its income but there is an opportunity to make ion

provisions, against bad or classified investment, from the compensate fund. Again, it

can spend the compensation fund to the social welfare activities which contribute to

increase the goodwill of the Islamic bank. These contribute to minimize the risks and

increase business indeed.

Other Factors

1. Welfare to the Society

2. Halal Finance

3. Growth of the Real Economy.

 31

Financial Analysis

Level of trust and confidence of the people is increasing in Islamic banks with

the passage of time and also a manifestation of a positive attitude of the people for

considering Islamic financial products as alternate and viable financing options.

Examination of the empirical analysis makes it possible for us to shed some light on

our findings and draw some conclusions.

Profitability measures indicates that conventional banks are more profitable;

 Different from Islamic bank in Return on Equity (ROE) and Profit Expense

Ratio (PER);

 ROE and PER reveals that Islamic bank is getting closer to conventional banks

in an upward trend;

 ROE is found rising for Islamic bank and plummeting for the conventional

banks gradually;

 Net Profits of Islamic bank are found to increase more rapidly than its equity

base causing ROE to increase;

 Loan Deposit Ratio (LDR) and Loan Asset Ratio (LAR) increasing rapidly;

 conventional banks are found to be more liquid than Islamic bank due to

Portfolio;

 Debt Equity Ratio (DER), Debt to Total Assets ratio (DTAR), and Equity

Multiplier (EM), indicates conventional banks to be more risky and less

solvent than Islamic bank;

 Operating income has positive impact on bank’s performance, which means

increasing the activities of banks causes increase in banks performance and;

 32

 Growth rate has in increasing trend, though profit of IBBL is increasing but it

remains in risky position and the return on asset of IBBL is in hazard

It is not unexpected to have many Problems in any Organization for this reason

already we have found many problems of financial performance of IBBL. To solve

these problems I can suggest following recommendations.

Strengthening the Islamic Banking Act (IBA) 1983 taking into account the distinct

characteristics of Islamic banking

 Developing a regulatory framework for Islamic banking by introducing a

separate capital adequacy, statutory reserve and liquidity requirement for

Islamic banks;

 Harmonizing the Sariah opinions on Islamic banking and finance to enhance

efficiency and promote market develop;

 Attention should be given to minimize the risks associated with profitability;

 IBBL should try to raise the more deposit ratio for carrying higher

productivity in future;

 The risk of returned on equity should be reduced;

 An increasing trend should be obtained in the case of solvency;

 The Islamic spirit in present Islamic banking system and its importance in

developing a true Islamic banking system;

 Establishing appropriate risk and liquidity management techniques and

 Competitiveness of the present Islamic banking system and its importance in

developing a future system;

In fine we can conclude that, the profit of IBBL is free of traditional interest. The

result of various ratio analysis shows that financial performance of IBBL is holding a
 33

better position. For economic development of Bangladesh it is playing a crucial role.

For making sustainable profitability this bank should minimizes its risks. We hope

this bank will increase its financial performance in future for earning a worldwide

reputation and establishing profitable image.

Conclusion
Overall, the technical, pure technical and scale efficiency scores are satisfactory and

consistent during the review period for the industry as a whole. The efficiency scores

are close to one for all banks all years suggest that the competition among the banking

industry is very intense in Bangladesh. Both second and third generation banks have

been able to prove their efficiency in recent years. Actually, no relationship is found

between the efficiency scores and the years of operation. The findings of this study have

provided updated information and the current context of Bangladesh banking industry.

Several important implications regarding the Bangladesh banking industry can be

derived from this study. The overall industry experienced a good score in efficiency

with few exceptions. It is also noted that there have been some developments of banking

operations and technologies used by conventional banks in recent years. This has been

further enhanced to start online banking, automated teller machine (ATM), credit card

and debit card. These facilities and innovation might make commercial banks more

efficient in recent years. These findings are supported by Yasmeen (2011) and she got

the same results for banking industry in Bangladesh. In other words, Islamic banks are

still lag behind to implement this kind of facilities compared to conventional banks.

Both Islamic and conventional banks should be able to implement the advance

technology efficiently with good management and optimal scale of operations.

 34

Reference

Ahmed, M. S. & Liza, F. F. “Efficiency of commercial banks in Bangladesh -

a Data Envelopment Analysis”, European Journal of Economics, Finance and

Administrative Sciences, Issue 56 (2013), pp. 130-152.

Ahmad, W. & Luo, R. H. “Comparison of banking efficiency in Europe:

Islamic versus conventional banks”, International Finance Review, 11 (2010), pp.

361–389.

Bader, M. K. I., Mohamed, S., Ariff, M., & Hassan, T. “Cost, revenue, and

profit efficiency of Islamic versus conventional banks: international evidence using

Data Envelopment Analysis”, Islamic Economic Studies, 15(2) (2008), pp. 23-76.

Banker, R. D., Charnes, A. & Cooper, W. W. “Some models for estimating

technical and scale inefficiencies in data envelopment analysis”, Management

Science, 30 (1984), pp. 1078-1092.

Berger, A. N. & Humprey, D. B. “Efficiency of financial institutions:

international survey and directions for future research”, European Journal of

Operational Research, 98 (1997), pp. 175-212.

Bhuia, M. R., Baten, A., Kamil, A. A. & Deb, N. “Evaluation of online bank

efficiency in Bangladesh: a Data Envelopment Analysis approach”, Journal of

Internet Banking and Commerce, 17(2) (2012), pp. 1-17.

Brissimis, S. N., Delis, M. D. & Papanikolaou, N. I. “Exploring the nexus

between banking sector reform and performance: evidence from newly acceded EU

countries”, Bank of Greece. Working paper, Economic Research Department -

Special Studies Division. (2008), pp. 1-38.

 35

Charnes A., Cooper W. W., & Rhodes, E. “Measuring the efficiency of

decision making units”, European Journal of Operational Research, 2 (1978), pp. 429-

444.

Colwell, R. J. & Davis, E. P. “Output and productivity in banking”,

Scandinavian Journal of Economics, 94 (1992), pp. 111-129.

Fortin, M. & Leclerc, A. “Should we abandon the intermediation approach for

analyzing banking performance?”, GREDI Working Paper 07/01 (2007), pp.1-19.

Gee, C. S. “Technical efficiency of commercial banks in China:

decomposition into pure technical and scale efficiency”, International Journal of

China Studies, 2(1) (2011), pp. 27-38.